Unlocking London's Property Puzzle: Exploring Leasehold Reform

 In this episode, we're diving deep into the topic of leasehold reform with two industry experts: Katherine Simpson, a legal specialist from Edwin Coe, and Justin Bennett, a valuation expert from LBB Chartered Surveyors.

The conversation kicks off with a recap of recent developments in the House of Commons regarding leasehold reform. Katherine and Justin shed light on the surprises and notable changes emerging from the legislative process, including the abolition of leasehold houses with certain exceptions, and the implications of permissive leases.

As the discussion unfolds, they explore the intricacies of ground rent reform, highlighting proposed caps and the potential impact on property valuation. They delve into the complexities of marriage value and the need for a revised valuation basis to simplify the process and avoid controversy.

Beyond ground rent, Katherine and Justin dissect other aspects of the bill, such as service charge transparency, building safety regulations, and conveyancing reforms. They express concerns about unintended consequences, including the potential depletion of housing stock and the impact on high streets.

Looking ahead, they discuss the upcoming process in the House of Lords and the importance of addressing technical valuation issues that have garnered less attention in the media. Despite media focus on service charges, they emphasize the need for a balanced approach that considers all aspects of leasehold reform.

Join us as we navigate the complexities of leasehold reform and gain valuable insights from industry leaders. Whether you're a seasoned professional or a first-time investor, this episode offers invaluable knowledge for navigating the London property market."

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Transcript

Outro  0:01  
Welcome to the London property podcast, your go to source for navigating the complex and ever changing London real estate market. Our digital marketplace provides informative and educational content from industry leaders. Through podcasts and videos. We cover various aspects of the real estate experience, including buying and selling finance, law, tax construction, design, and more. Join us as we delve into the latest trends and developments in the market and gain valuable insights from our panel of experts.

Farnaz Fazaipour  0:34  
Hello, and welcome to London property, the home of super prime. I am your host Farnaz Fazaipour. And we're delighted to welcome Justin Bennett from LBB Chartered Surveyors and Catherine Simpson from Edwin co back to the show, talking about a topic that is very hot at the moment, which is the leasehold reform. Now, the last time we had a conversation about this, it was about to be heard in the House of Commons. Correct. So let's talk about I mean, for our listeners who haven't listened to the previous interview, then they should probably do that. But we'll start with it went to the House of Commons at the beginning of March.

Katherine Simpson  1:15  
And it's today having its second reading in the House of Lords. So

Farnaz Fazaipour  1:18  
now we're towards the end of March and it's going to the House of Lords. So let's talk about what actually was achieved or not achieved in the first hearing at the House of Commons. So what would you say was were the big surprises for you?

Katherine Simpson  1:34  
Well, what was noticeable was what actually didn't make it into the first draft of the bill, which was the abolition of leasehold houses, which was always promised, that has now made it in as a whole new section one with certain exceptions. So it's not a total ban on leasehold houses.

Farnaz Fazaipour  1:52  
Right and before we got on camera, you mentioned that where there is an exception is if you build a house on a leasehold land,

Speaker 1  1:59  
yeah, so now you you have permitted leases, which can be prescribed under statute or ratified by the tribunals. But there is a form of self certification as well. But there are quite hefty fines for creating leasehold houses and my understanding of the what is being proposed that if you breach the obligation of sorry, if you granted Lisa the house, which isn't permitted, that lease will remain in place but the freehold but freehold will be offered, often at minimum cost to the lease holder, to put them in a position that they would have been. And I think the idea behind the permissive leases is the fact that once you have these houses they then become capable of in franchise mode. So people can then in circumstances where the properties couldn't be built, because of leasehold piece of land, eventually they can get the freehold off that piece of land. Right.

Farnaz Fazaipour  2:55  
So obviously, you know, there is a lot of kind of market dynamics that goes into the what are the implications of some of these things coming forward? So what just broadly speaking, when, when it went to the House of Commons, what would you say? I'm going to ask you both this question. So maybe from from from the legal point of view first and then from the from a valuation point of view, but what would you say? Are the things that look like that unlikely to happen?

Katherine Simpson  3:25  
Well, the Ground Round consultation is now closed, and go over the weekend. There was an article in The Sunday Times, which said that he is, you know, pretty determined to somehow abolish not I think he accepts he cannot completely abolish grants, we're not going to have a peppercorn situation, but in the times the article mentioned a cap at 250 pounds. I have actually heard that he it may be a naught point 1% of freehold value cap. And apparently he is looking to seek Council's opinion on the human rights challenge that because you're going to be wiping 40 billion off, you know, investors, you've got you've got charities, you've got developers who have legitimate ground rent incomes, which will just be completely decimated. It's intended

Farnaz Fazaipour  4:14  
to go backwards as well. It's not just moving forward.

Speaker 1  4:17  
Well, it's intended to change existing leases. So we already have the ban going forward, because we this has been in place since 2022. But it's talking about a retrospective change the law. Exactly. It is it's Simon on whether grand rents will immediately be capped a point 1% or up to 50 pounds or at whether it is as drafted in the bill at the moment. It's in for the purpose of valuation. You either value the existing grand rent, if it's an excess of or you value a point 1% On the Review, which is the cap on the rent for the value of purpose the valuation and That makes a drastic change in the valuation in the basis that it's proposed. That is, essentially made it through Parliament to Lord stage without any challenge whatsoever. There's been very, very few discussion points in in the public domain in any event of the implications of the value valuation proposals

Katherine Simpson  5:22  
go, we'll be looking to achieve it as high as possible abolition as he possibly can. But it does accept but it's not going to be a peppercorn rent. But he knows he's going to Face Face Challenge, which is why he's looking at the human rights balance. It's all about proportionality. I mean, the thing I find slightly surprised about the whole ground rent thing of it. There's been a lot of drama and sort of abrupt Cold War hysteria about it. But of course, this is where I think the whole legislation began back in 2017, was what we call the Taylor Wimpey scandal, people having very being sold leasehold houses that didn't know they had leasehold houses. Some of them they claim with, you know, onerous very onerous doubling ground rents, and also provisions in the leases, which meant landlords could charge and ridiculous amounts of money for basic hang up a picture, and that I think there was a little bit of a danger with conflating the sort of service charge issues with ground rents. Because when I typically, you know, I'll get a call from somebody who wants to extend their lease. And you know, we'll do a quick online calculation to how much it's going to cost. I'll say to them, oh, how much is your ground rent? And they don't even know. So that tells me that it's not a big issue. They say, Oh, something like 200 pounds, which I think we accept isn't as dangerous Grandmont. But I think there's a slight danger to see that most people aren't troubled by the ground rent, to decimate it, and then destroy, you know, charities, other investors who have legitimate ground rent portfolios seems to be to be madness, and totally disproportionate. On

Farnaz Fazaipour  6:54  
that subject, you were referring to a Knight Frank study about the financial impact of such a thing?

Speaker 1  7:00  
Oh, yeah. There's no upfront research that was published along with a university and excuse me, but I can't remember the name of the university essentially says that the impact of the proposals not so much the grant remember, the overall proposals will, on average, increase property, leasehold property prices by around 10%, which will have them have the knock on effect of wiping, making it even more difficult first time buyers to get into the markets. But the Grandmont issue itself is one where, you know, there are easy ways to curtail this, I don't see why they do not just simply legislate some ban unrestrained rates insofar as the 510 15 year doublers. Once we get into a situation where you have the 25 year review that the 33 year reviews, you're getting close in line with the government inflation targets, and these are levels that are only being reviewed every 25 or 33 years. So that in between periods, there is no growth in the Grandmont capsule neck, it can be managed in that way. So the minimum grand rent term was 25 years or 33 even and then you're not destroying the whole industry behind it with an all these funds that are reliant on the income. And it could be individuals who have bought their freeholds in large blocks where they bought these three holes, because of the owners grown rents to get themselves and the participants added situation who then locked in with their suddenly the hit with picking up the tab for every other one of the neighbours who chose not to participate in first place. without compensation. It is insane some of the proposals and

Farnaz Fazaipour  8:44  
so the bill itself is not just focusing on on leasehold and ground rent and it's got some other I mean, on a high level basis. What are some of the other things that it's addressing, you will mention service charges Building

Katherine Simpson  8:59  
Safety Act, service charges even the conveyancing process to make and with service charges to make the system more transparent, easier for tenants to get together to challenge service charges without being concerned about landlords costs and it also addresses landlords costs in the in franchise arena and quite controversially is proposing to remove the obligation for tenants to pay landlords costs in any and franchise my claim except in certain certain circumstances, which I think is another area which seems to me open for for challenge because there's no other compulsory purchase situation where a landlord has to pay their their own bear their own costs. And what will happen is that landlords will avoid using solicitors and valuers and the whole thing will just be chaos.

Farnaz Fazaipour  9:55  
God we don't need any more dysregulation in this industry is that We're already trying to deal with all the consequences of having a whole bunch of agents with no licences. But so tell me something else. So now it's gone through the commons. And now what happens in the House of Lords. So,

Speaker 1  10:13  
so essentially the same process is going to happen in the House of Lords. So 27th of March, the second reading in the House of Lords, they will then table discuss the bill itself, before it goes to their own committee stage, which will then go through line by line the legislation in the same way as the House of Commons did, and then it will go back to the third reading, which will, they will vote on their proposed amendments, which will then be sent back to the House of Commons. It is probable, I would hope that there will be a more robust discussion around the valuation issues which were naion not discussed in the House of Commons. And perhaps, the 50%. Now that the act is proposing to change 25% non residential buildings, to 25% non residential buildings being capable of enfranchisement that we'll get discussed, because otherwise, we're going to see drastic changes to the profile of the high streets. So

Farnaz Fazaipour  11:19  
just to explain that a bit a little bit more to our listeners. Currently, if you've got a building that's got more than 25% of its entire total rent, as commercial, it falls outside of the act, and you can't get the freedom.

Speaker 1  11:34  
Yeah. Just to clarify, the point on the non residential is the act is actually says non residential, although, in effect, it's commercial. Yeah, yeah. Okay. And

Katherine Simpson  11:44  
you exclude common parts in the calculation. And they're raising that 25% to 50%.

Farnaz Fazaipour  11:50  
you exclude the common parts, but also you say that it's, it's commercial, but then on the Grosvenor estate, they've got these funny leases that are 21 years, so they're considered special, better answers. So they say the freehold.

Katherine Simpson  12:03  
That's a different point, that's about making your lease not qualifying by making sure it's not a long lease. So long lease is a lease in excess of 21 years, right.

Farnaz Fazaipour  12:12  
But then if you've got currently if you've got more than 25% of those type of properties, then that building falls outside being called freehold and franchise protects Eaton square, mainly,

Speaker 1  12:23  
well, well, no, because it still remains residential. Yes, that would be it's a non qualifying lease, but it means residential, so it would fall into the residential category. But when it comes to calculating the number of people joining in to extend to go for the freehold, there would be a non qualifying lease, it's about

Farnaz Fazaipour  12:42  
qualifying is let's call it okay. Yeah. So just to go back to that. So once you've got this race to 50%, then the most frightening thing that could happen is you'll have high streets like Marleybone, where 50% commercial being on the ground floor now means that the flat owners upstairs can become the freeholders of the shops and the high street who know nothing about how to run retail commercial offices, but they're the freeholders and then they're calling the shots, which is in reverse when you look at big buildings where you've got 100 flats with long leases. So actually, the majority of the interests falls with the lease holder. And you've got the freeholder making the decisions, who might hold two or 3% of the value of the building. So one way you know it causes a chaos in the High Street and then the other way, it's the person who has the least enjoys making the decision.

Speaker 1  13:45  
Essentially, it's going to be the devils in the detail because the, the leaseholders if they collectively in franchising have to offer for the commercial elements. What is proposed is that there will automatically be a leaseback of the commercial elements. So they will have the control of the ground floors and basements perhaps if they're commercial first floors, whatever. And there will be there will be a further option that the lease holders can elect for the freeholders to take 99 year leases back on non participating flats. So you could have a situation where the lease holders collectively own the freehold. But the original freeholder then has control of individual flats within the building and of the ground floor, but with restrictions on operation of the ground floors that they never had before, which is where you, you will have your ad hoc ownership of high streets, but you will have the same owners controlling the commercial elements but subject to the whims of the lease holders, who will be perhaps looking to mitigate their costs for Mason and so that you may have one beautifully maintained building one next to one which is less well maintain them, it could just purely be, because one will insist on five year external direct decorations. And one will say, look, let's the decoration, shins are fine, we will leave it for seven years. So instead of high streets being decorated, in one go there will be decorated at different times. So you will walk down the street and be scaffold on one building something going on another. So you won't have these clean parades of shops that you find in the central London locations.

Katherine Simpson  15:25  
So potentially our high streets are going to be decimated, and in the hands of basically amateurs. And there is also an issue I think about. I mean, many lenders actually don't like lending on flats in commercial above shops, they didn't lend. And so it may actually affect the marketability and marketability of flats. Knowing that, you know, you've got a building that's in the hands of, of people who simply don't know how to run commercial premises.

Farnaz Fazaipour  15:52  
So I'm going to play devil's advocate a little bit here, because basically, we used to the Grosvenor owning 500 acres and the kadaga and earning 200 acres and you know, whatever, of prime central London, but there is the flip side, which in Europe, presumably, the high streets are not owned by big landlords, I don't know enough about it to say with with certainty, but, you know, they seem to have some pretty nice treats that seem to work. So there's got to be a layer of something you can do. Although it sounds crazy to put, you know, an asset in the hands of people whose business is not to run realist, retail, it will but it will certainly

Katherine Simpson  16:35  
disincentivize developers who will have to reset their parameters, when they're building these sorts of things on the high street, they will look to increase the commercial, so that it's over 50%, and therefore there'll be reducing the residential stock. So we will have will have a situation where our housing stock is depleted, which was certainly never what the government intended. Well, it's the

Farnaz Fazaipour  16:59  
only thing the government intends to do is to increase housing. But again, at the same time, all the things that happen affordable, housing,

Katherine Simpson  17:08  
affordable housing for all, and that is totally contrary. So that's

Speaker 1  17:13  
one of the issues with the reducing the one off transfer from free holder to the existing lease holder for the from the with the reduction in the premium, that going forward, that person who has the flat now will either sell it at a higher price, or will take advantage or it will be a situation of the leases will be extended and the resale will be at a higher price. So you will remove this ability for somebody to enter into a market. You know, I could say I would love to live in Queensgate. But I can't afford 100 year lease on a flashing greenscape I can afford a 10 year lease. So I can go into Queensgate in my 10 year lease elect to me perhaps hope that the market rises, sell it in three or four years time get my money back, move on let the next person go in all of a sudden, that property, instead of being worth perhaps 25% of the value, something's worth 50% of the value of the 100 year lease. So that restrict up prices me ice immediately. And you know, so you're you can take that into any part of the country, it can be in the Midlands, that the economics will be different. But the principle will be the same.

Farnaz Fazaipour  18:24  
But these leases have to actually reduce first. So we're we're in most cases 7080 years away from that. But the when

Speaker 1  18:31  
you look at the the costing for the removal of merge values in a give or take 25 billion that is all on leases that are below 80 years. And that doesn't potentially doesn't account for the ones which will fall into the below ATO category beforehand. effects you're moving the assumption the the Assam the fact that marriage value is ignored in the current legislation over 80 years, which it wasn't when that the legislation was originally enacted. You're moving that to marriage value is ignored at all times, regardless of whether it exists. Now.

Farnaz Fazaipour  19:11  
Can I ask a really basic question here? Why do we have to deal with the by marriage value and why can't we just deal with it by just valuation? But it is but why can't we just say that, you know, take away that marriage bit.

Katherine Simpson  19:26  
Because marriage value is inherent in property value and

Speaker 1  19:30  
it doesn't matter. The amount in the in the real worlds maritally is something that exists, an investor will buy the building in the hope of obtaining possession of it in a period in a certain period of time we'll take rent income on that building for that period of time. It can be a shop on the high street can be an office building, but essentially if he's buying something that is already on a long lease, he is buying something for the income and for the reversion. In the future, he will be in the residential market, we use the Sportowy rates to discount. And so we know when we enter this valuation, what it is the fact that we're using 5% for flats and 4.75%. For houses. It in reality inflates the value of what those were. Because, you know, when those rates were set, the markets were much different, much more different. But in any event there is the landlord has an interest. And that's reflected in what becomes the marriage value. Marriage value is simply comparing what both people have afterwards with what both people have before. And the valuation of both interest is different when you total either sides of the equation, what the difference is the marriage value,

Farnaz Fazaipour  20:54  
except that it's not because you're paying half of it money, you're

Unknown Speaker  20:57  
keeping half, and they're getting half because

Katherine Simpson  21:00  
shared, I think one very basic way of looking at marriage value is and people often use this analogy is, is you've got two vases, one in the freeholders hand one in the leaseholders hand. So they both have a value of their own, but they're more valuable when they're put together. So it's about the coalescence of those two interests. So when you in franchise as a lease holder, and you get your freehold or your long lease, you're, you're coalescing that value, and then you share it between you.

Speaker 1  21:30  
And when in reality, it's no different to a ransom strip for plots of land, you have a plot here, where you want to build your house, but there's a pathway here, where each which you can get to your piece of land. So that land has an increase in value, which is how much more or both plots worth, because of merging them together, you merge those two interests together, you have a marriage value, and you agree to split the difference.

Farnaz Fazaipour  21:57  
Now, so we're gonna go to the House of Lords, it's going to go to committee afterwards, go back to the House of Commons. So as experts, and you know, we should say this at the beginning or at the end, but just a little bit about how much you've been involved in this whole process. Before we answer the next question. You've been, you've been following it quite closely. You've actually made some comments towards the proposed papers.

Speaker 1  22:23  
Yeah. But I present evidence into the House of Commons. On what I thought was the implication of this bill, and what could have been done far more simply, yeah, I'm going back to my value, it was removed the statutory assumption that you're the young least in the market that can't extend your list.

Farnaz Fazaipour  22:41  
So my question is, having been so hands on and involved in this process, both of us professionals, you know, from a legal perspective and evaluation perspective, what do you fear is going to be the result of this whole process?

Speaker 1  22:55  
For me, it's the that there is no changed proposed valuation basis. You think that that might end up happening? Well, it went through the whole house of commons with probably four questions raised in public domain on the valuation. That's what

Katherine Simpson  23:10  
I found actually quite alarming. Watching the select committee, which is, you know, valuers were invited to give evidence and were really asked very little, and there was an awful lot of airtime given to, yes, those who'd suffered at the hands of developers and leasehold houses. Huge amount of air time, but really no detail.

Unknown Speaker  23:30  
The concentration was on service charge, the subconscious

Katherine Simpson  23:32  
was settled on service charges, which is an error that needs reform. But the franchise that the easier and cheaper bet is will be achieved through through the standard valuation method.

Speaker 1  23:43  
Yeah, there's, there's, there are ways of simplifying it to make it cheaper. Without the controversy, and it's only this weekend passed where it's been brought into the public domain by the nationwide press.

Farnaz Fazaipour  23:59  
So it sounds like the bits that are very press worthy, are the bits that they're being focused upon. But you know, the really technical stuff that really needs to be addressed, is the parts that no one's really giving an attention to. Yes,

Speaker 1  24:14  
and yes, and it's now because it's come out in the press, the suddenly the government's taking interest in and the MPs are taking more interest in, in it. And perhaps when it goes back, having been it through the Lord's and through the Lord's committee, it will go back with amendments to the valid basis of valuation that may lead to the government having a rethink, or it could just make it merely be that they put through all the non controversial parts like an immediate qualification, there's no need for the to your material to your weight, other than to make it more expensive. So that can easily be removed. The 990 They can keep that they can keep that the the notion that the property is sold in terms The valuation itself based on a 990 year lease which, which is the most the freeholder would ever get for it in the first place, because there's freehold an immediate with that they sell the lease loose the additional 1% of their have. So

Farnaz Fazaipour  25:13  
thank you very much for joining us again and we will be certain to have you back after the legislation has gone through the House of Lords and back to the comments. So hopefully we will be able to take some more of your time up there. And thank you for coming.

Unknown Speaker  25:24  
Thank you.

Farnaz Fazaipour  25:25  
Thank you and to our listeners if you have got any questions to do with the legal side or the valuation side of the leasehold Reform Act, then do please get in touch. As you can see, we speak to leading experts about the subject and we'll be delighted to hear from you to give you a guiding hand. Thanks

Outro  25:42  
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